When the Bank Robs You

Mehrsa Baradaran’s How the Other Half Banks tells the history of banks robbing from the poor and giving to the rich--and explains how we can stop it.

David Dayen October 7, 2015

Banks have a history of failing the poor. (Tim Kwee / Flickr)

After the death of Michael Brown, Mis­souri Gov. Jay Nixon con­vened the Fer­gu­son Com­mis­sion to iden­ti­fy the root caus­es that led to the social dis­lo­ca­tion of racial­ly seg­re­gat­ed cities around St. Louis. The report not only sin­gled out famil­iar prob­lems like cit­i­zen­po­lice rela­tions, munic­i­pal gov­er­nance and lack of pub­lic ser­vices. It also includ­ed banking.

The halting attempts to bring the poor into the fold of financial services read like a farce, with every promising effort subsumed by the profit motive.

His­tor­i­cal­ly, there are few­er bank­ing facil­i­ties in dis­tressed com­mu­ni­ties,” the authors write. And with­out a bank or cred­it union account, sim­ple func­tions like con­vert­ing gov­ern­ment ben­e­fits into cash, or con­vert­ing that cash back into a check to pay bills, or secur­ing a small loan in emer­gen­cies, become exor­bi­tant­ly expen­sive. Avail­able sta­tis­tics sug­gest that the aver­age unbanked fam­i­ly spends more on finan­cial trans­ac­tions than they do on food.

This exploita­tion increas­es pover­ty and despair in poor com­mu­ni­ties. Peo­ple are denied the build­ing block of eco­nom­ic oppor­tu­ni­ty: the use of cred­it to acquire wealth. Liv­ing in an all-cash neigh­bor­hood increas­es vul­ner­a­bil­i­ty to crime and alien­ates neigh­bors. And such ten­sion can lead to tragedy.

Com­mu­ni­ties like Fer­gu­son are all too com­mon in Amer­i­ca. In How the Oth­er Half Banks: Exclu­sion, Exploita­tion, and the Threat to Democ­ra­cy, Mehrsa Baradaran of the Uni­ver­si­ty of Geor­gia School of Law argues that by deny­ing finan­cial ser­vices to the poor, banks have bro­ken the social con­tract that jus­ti­fies their pub­lic charter.

Mod­ern bank­ing wouldn’t exist with­out the state. Cus­tomers freely deposit tril­lions in banks because of gov­ern­ment-backed insur­ance, and the qua­si-pub­lic Fed­er­al Reserve lends direct­ly to banks at slim inter­est rates. In 2008, the fed­er­al gov­ern­ment topped this off with hun­dreds of bil­lions of dol­lars in emer­gency loans. If we bail out banks to pro­tect the pub­lic, why don’t we demand that they serve every­one in society? 

Dur­ing dereg­u­la­tion in the 1980s, banks won the argu­ment that they should be treat­ed like any oth­er indus­try, with­out a pub­lic respon­si­bil­i­ty. Baradaran unearths a 1987 FDIC doc­u­ment that dis­miss­es the neg­a­tive con­se­quences of mega-banks: It is not clear that large orga­ni­za­tions or high­ly con­cen­trat­ed indus­tries are able to wield too much influ­ence over government.”

After dereg­u­la­tion, poor areas were aban­doned, as the poor don’t make prof­itable cus­tomers. Between 2008 and 2013, banks shut­tered near­ly 2,000 branch­es. Nine­ty-three per­cent were in postal codes with incomes below the nation­al median.

But, as Baradaran impres­sive­ly recounts, the poor have always had dif­fi­cul­ty obtain­ing finance. She quotes a 19th-cen­tu­ry Chica­go banker who explains that his firm lev­els a pro­hibito­ry charge upon all accounts which aver­age less than $300 for the express pur­pose of dri­ving them away.” And the trag­ic his­to­ry of redlin­ing, deny­ing hous­ing loans to African-Amer­i­cans and shunt­ing them into seg­re­gat­ed com­mu­ni­ties, cre­at­ed cities like Ferguson.

The halt­ing attempts to bring the poor into the fold of finan­cial ser­vices read like a farce, with every promis­ing effort sub­sumed by the prof­it motive. Cred­it unions, found­ed in Amer­i­ca in the ear­ly 20th cen­tu­ry on the idea that peo­ple with­in a cer­tain occu­pa­tion could pool their mon­ey and lend to mem­bers in need, are today more like­ly to serve upper- and mid­dle-income cus­tomers. Com­mu­ni­ty banks were over­whelmed by mega-bank con­sol­i­da­tion after the 1994 lift­ing of restric­tions against open­ing bank branch­es across state lines. Com­mu­ni­ty devel­op­ment finan­cial insti­tu­tions invest in poor com­mu­ni­ties, but pri­mar­i­ly through large-scale projects, not direct lending

Many of Baradaran’s case stud­ies are part of our shame­ful his­to­ry of struc­tur­al racism. Freedman’s Sav­ings Bank, cre­at­ed by Pres­i­dent Lin­coln after the Civ­il War for for­mer slaves, was dereg­u­lat­ed with­in five years, and depos­i­tor funds were used for risky real estate spec­u­la­tion. In June 1874, the bank closed and depos­i­tors lost $3 mil­lion (about $60 mil­lion today). In 1910, Vir­ginia lawyer Arthur Mor­ris cre­at­ed the first indus­tri­al loan com­pa­ny (ILC), deliv­er­ing install­ment loans to indi­gent bor­row­ers. But by the 1940s, local oper­a­tors of ILCs began to com­pete for high­er-wealth cus­tomers, los­ing their mis­sion-based focus. Serv­ing the pub­lic good always crash­es the moment financiers decide they would rather make a profit.

While non-preda­to­ry bank­ing options for the poor fail, man­dates on large banks to extend cred­it to low-income earn­ers typ­i­cal­ly pro­duce only bit­ter bankers and bad prod­ucts. The Com­mu­ni­ty Rein­vest­ment Act (CRA) of 1977 has been vil­i­fied by bank lob­by­ists and con­ser­v­a­tives alike, and even accused of dri­ving the finan­cial cri­sis. It’s not clear that lend­ing to the poor has increased mean­ing­ful­ly, but the CRA’s require­ments are so lax that 97 per­cent of banks test­ed for com­pli­ance have passed. In 2008, the FDIC recruit­ed 31 vol­un­teer banks into its Small-Dol­lar Loan Pilot Pro­gram. But the prod­ucts offered were no bet­ter than what peo­ple could get from the check-cash­ing store. After two years, Con­gress pulled the plug.

Tech­no­log­i­cal inno­va­tions like reload­able pre­paid cards, peer-to-peer lend­ing and mobile bank­ing could help relieve the cri­sis. Wal­mart has become a nation­al leader in bank­ing to the poor with its Blue­bird pre­paid card, cheap check-cash­ing and even an FDIC-insured check­ing account, in part­ner­ship with Green Dot Bank. But Baradaran won­ders whether the retail­er will apply its mod­el of edg­ing out com­pe­ti­tion to gain a monop­oly, then rais­ing prices.

After tick­ing off the prob­lems with all oth­er options, Baradaran turns to the idea of a U.S. Postal Ser­vice bank. From 1911 to 1967, the post office did offer sav­ings accounts, attract­ing mil­lions who pre­vi­ous­ly kept their mon­ey under the mat­tress. At its height in 1947, 4 mil­lion Amer­i­cans held $3.4 bil­lion in postal deposits. Baradaran calls it the most suc­cess­ful exper­i­ment in finan­cial inclu­sion in the Unit­ed States” and thinks we’ve reached the moment to restart it.

Not only would a USPS bank reduce inequal­i­ty by pro­vid­ing cred­it to mil­lions while poten­tial­ly sav­ing them bil­lions in fees, it would shore up the Postal Service’s finances and sus­tain post-office employ­ment as a mid­dle-class career. And it would elim­i­nate pay­day lenders and check-cash­ing oper­a­tors, inter­est­ed only in skim­ming a hefty take for pro­vid­ing the finan­cial ser­vices the mid­dle and upper class­es take for granted.

Thomas Jef­fer­son warned that banks were more dan­ger­ous than stand­ing armies,” and 18th-cen­tu­ry Penn­syl­va­nia Rep. William Find­lay char­ac­ter­ized their nat­ur­al incli­na­tion to con­cen­trate pow­er as incom­pat­i­ble with the prin­ci­ples of a demo­c­ra­t­ic social order.” These fears have been real­ized in cities like Fer­gu­son, which the mega-banks have aban­doned. Dis­pro­por­tion­ate access to bank­ing robs the poor of the tools they need to escape pover­ty. If we want to make soci­ety more just, we must democ­ra­tize finance.

David Dayen is an inves­tiga­tive fel­low with In These Times’ Leonard C. Good­man Insti­tute for Inves­tiga­tive Report­ing. His book Chain of Title: How Three Ordi­nary Amer­i­cans Uncov­ered Wall Street’s Great Fore­clo­sure Fraud won the 2015 Studs and Ida Terkel Prize. He lives in Los Ange­les, where pri­or to writ­ing about pol­i­tics he had a 19-year career as a tele­vi­sion pro­duc­er and editor.
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